Oil and Gas Industry Well-positioned if Recession Hits

Wary oil and gas executives prepare for a recession as they grapple with inflation and struggle to hire. They hold firm to capital discipline despite the siren call for growth emanating from the triple-digit price of WTI. And they navigate a rocky M&A terrain with more deals of lesser value, steering away from blockbusters.

Welcome to midyear 2022 in the age of contradictions.

There’s plenty of data, but no certain knowledge about what is to come; high oil prices that bring the industry grief may not be high enough to balance the market; and energy investors are finally getting their paydays in the midst of an equity market downturn.

Could oil reach $145/bbl again, as it did in July 2008? Sure, and it could close at -$37/bbl again, as it did in April 2020. The -$37/bbl close was a one-time affair, but miserable-for-longer is always a possibility.

For example, the $145.31/bbl close just before the July 4, 2008, holiday morphed into a price of $30.28/bbl just two days before Christmas 2008. Another example: the tumble from a peak of $108.23 in September 2013 to $44.08/bbl in January 2015. And another example … well, best not to dwell.

But keep this in mind: 2022 is not 2008. A lot has changed.

Recession forecasts: It was the winter of despair…

It’s unclear whether the world is headed toward a recession. As defined by the National Bureau of Economic Research, a recession is “a significant decline in economic activity spread across the economy, lasting more than a few months.”

The impact is seen in:

  • Real GDP;

  • Real income;

  • Employment;

  • Industrial production; and

  • wholesale-retail sales.

David Rodeck, in a piece for Forbes Advisor, lists several catalysts for a recession, including a sudden economic shock, such as the COVID-19 pandemic, and excessive inflation. Another is technological change, such as artificial intelligence and robots eliminating categories of jobs.

The near-term worry is that the economic recovery from the pandemic has sparked excessive inflation. The Consumer Price Index for June showed a 9.0% annualized increase in prices over the previous 12 months. To control these hikes and cool the economy, the Federal Reserve has already raised interest rates three times this year for a total of 1.5 percentage points. Depending on economic indicators, the fed has signaled it may raise the cost of borrowing yet again.